"Funds in Time - Major Challenge for SMBs"

by Amit Tripathi    Jun 19, 2007

What is SMERA’s definition of SMBs in India?
SMERA has no specific or separate definition for determining SMBs. However, SMERA ratings categorise SMBs based on net worth size, which is as follows:

A - Rs.20 crores and above
B - Rs.5-20 crores
C - Rs.1-5 crores
D - Less than Rs.1 crore

Do you think it would have been better if there was a common definition of SMB in India?
A common definition would help in avoiding the prevailing confusion and bring more clarity to the whole process in terms of collating and analysing data pertaining to SME productivity, growth, and financing. But, at the same time one needs to be conscious of the fact that business requirements are not dictated by definitions, but business objectives of maximising returns, be it SMBs or their partners in growth (viz. industry of lending institutions). As such, a common definition of SMB is more a requirement from the policy makers and regulators point of view.

What are the typical challenges that SMB organizations encounter these days in India? What steps are suggested to address those?
The small units are facing many challenges in running their business, like not having adequate and timely access to the funds from the banks and financial institutions, and a delay in implementing programs and projects with limited access to external finance. Therefore, they depend more on internally generated funds for expansion and modernization. The other major challenges faced by small enterprises are global competition with the integration of global economy, lack of infrastructure and obsolete technology, and retention of good quality manpower.

The first and foremost step for revitalizing the SMB sector is to provide them better access to funds by ensuring higher credit flow towards the sector. This single most important objective can be achieved by popularizing the concept of rating among the SMB fraternity, and making them more credible in the eyes of lenders. SMERA has been a pioneer in doing this crucial activity, but more policy push from government and financial institutions are necessary for accomplishing the task. In addition, adequate measures in terms of imparting training for adopting latest technology, and best practices for enhancing competitiveness are the need of the hour. SMBs also have the least access to market and trade intelligence to formulate their strategies.

What is the need for rating?
Rating brings out the strengths and weaknesses of the unit and provides opportunities to enhance its competitiveness. It is considered to be a very effective tool for self assessment. It also acts as a fillip in raising the overall credibility of the enterprise in the market place.

Rating pinpoints toward the overall health of SMBs, explains exactly how the business will fit in relation to competitors, and how to deal with it. Well rated companies receive several benefits from lending institutions like reduction in interest rates, relaxation in collaterals, enhancement of borrowing limits, lesser processing time of loan application, etc. Companies are better placed in creating export opportunities in the international market if they receive good rating.

What are the concrete advantages that an SMB organization gets if it is rated by SMERA?
Since SMERA rating is an independent, third party assessment of the overall condition of an SMB organization, which take in to account both financial as well as the non-financial parameters, it aids the organization in suggesting ways for business enhancement.

Moreover, the rating by SMERA has wider acceptance within the entire banking and financial system of the country. Besides, registered SSI units rated by SMERA can avail of government subsidies to the extent of 75% on the rating fee. There are provisions for reduction of interest rates for well-rated companies. In this regard, SMERA has entered into MoU with 20 banks.

In what way does this help start-up companies to get financial assistance from private and public partners?
A greenfield project or start-up company can attract the attention of venture capitalists for equity participation if it is rated by an agency like SMERA. The rating can act as an initial due diligence, distinguishing creditworthy proposals from the others. Credit rating helps ensures financial disclosures, and accordingly provides better access to capital and debt sources. They can exploit their limited assets by showing their credit information to the private and public banks, which in turn, will help in loan pricing. This is particularly relevant where SMBs face acute shortage in accessing capital and depend heavily on their own source for funding. It has been established in the World Bank report that SMBs rely on external funding only to the extent of 17%, when compared to large companies where the reliance and access to borrowed finance is 44%.

How can IT usage, by an SMB organization, help it receive financial aid from BFSI?
SMBs are now acknowledging the use of IT in their business. However, use of IT has been limited largely for handling accounting solutions. Linkage with their large customer enterprises for accessing their IT systems has motivated small businesses to adopt similar, though scaled down versions of comprehensive IT solutions. The main driver for increased adoption of IT solutions, including Enterprise Resource Planning (ERP) in SMBs, is increasing competitive pressure, making these organisations more customer-focused, quality conscious, and efficient. However, this demand has been limited only in few pockets and amongst larger units of the small business. Encouraged with this limited success, many software companies are approaching SMBs for ERP solutions. However, the high capital cost of such solutions has restricted it from generating a mass appeal among SMB units. But, over and above, an IT savvy organization definitely stands a better chance of availing of financial assistance as IT brings in transparency.